DRIVERS OF COST SYSTEM DEVELOPMENT IN HOSPITALS:

RESULTS OF A SURVEY
EDDY CARDINAELS • FILIP ROODHOOFT • GUSTAAF VAN HERCK
 Drivers of cost system development in hospitals:

Results of a survey

Eddy Cardinaels a, *, Filip Roodhooftb and Gustaaf van Herckc

a Assistant Professor in Accounting, Faculty of Economics and Business

Administration, Universiteit van Tilburg, P.O.Box 90153, 5000 LE Tilburg, The
Netherlands

b Professor in Accounting, Department of Applied Economics, Katholieke

Universiteit Leuven, Naamsestraat 69 and Vlerick Leuven Gent Management School
Vlamingenstraat 83 B-3000 Leuven, Belgium

CProfessor in Accounting and Hospital Management, Department of Applied

Economics, Katholieke Universiteit Leuven, Naamsestraat 69, B-3000 Leuven,
Belgium

* Corresponding author. Tel: + 31 13 4668231; Fax: +32 13 466 8001.

e-mail address:e.cardinaels@uvt.nl
 Drivers of cost system development in hospitals:

Results of a survey

Abstract

While many hospitals are under pressure to become more cost efficient, new costing

systems such as Activity-based costing (ABC) may form a solution. However, the

factors that may facilitate (or inhibit) cost system changes towards ABC have not yet

been disentangled in a specific hospital context. Via a survey study of hospitals, we

discovered that cost system development in hospitals could largely be explained by

hospital specific factors. Issues such as the support of the medical parties towards cost

system use, the awareness of problems with the existing legal cost system, the way

hospitals and physicians arrange reimbursements, should be considered if hospitals

refine their cost system. Conversely, ABC-adoption issues that were found to be

crucial in other industries are less important. Apparently, installing a cost system

requires a different approach in hospital settings. Especially, results suggest that

hospital management should not underestimate the interest of the physician in the

process of redesigning cost systems.

Keywords: Activity Based Costing, Organizational Change, Cost Control, Hospital context
1. Introduction

With margins on the decline, more restrictive reimbursement schemes based on

diagnostic-related groups (DRGs), increasing complexity and rising costs, the health

care sector faces a new challenge of becoming more cost efficient to survive in this

changing environment [1,2, 3]. More developed cost systems such as Activity Based

Costing (ABC), may facilitate this strive for cost efficiency. ABC provides more

detailed cost information on the activities of the hospital, which could typically result

in better cost reduction and cost management [4, 5]. In other industries, it has proven

to be successful since firms that extensively use ABC outperform similar matched

firms that do not adopt ABC, mainly through more efficient cost control efforts [6, 7].

However, while there are different levels of cost system design, it seems remarkable

that the number of hospitals collecting cost on a more detailed basis remains limited

[2]. Relative to other industries, the health care sector still lags behind [8]. The reason

for this discrepancy has hardly ever been investigated. The main contribution of the

present study is that it provides an insight in the factors that in fact drive (or inhibit)

further cost system development in the health care sector. Via this insight,

management may better understand the crucial factors for promoting cost system

improvement in a health care environment.

As a starting point we look at ABC-adoption in other industries. We will test

whether the few existing factors known to be associated with the adoption of more

accurate costing systems in these industries, are applicable for the health care sector

[9, 10, 11]. Secondly, it is important to note that the present study takes the specific

behavioral and organizational factors of the sector into account [12]. Unlike

manufacturing companies, health care providers in many countries are for refunding

1
purposes legally required to allocate costs in a predefined manner e.g. Medicare Cost

System in the US, [13]. Hospitals may find this legal cost system sufficient and hence

more refmed costing methods such as activity-based costing may not be considered.

Important powerful coalitions [12] such as the physicians may have a stake in whether

the cost system is further developed. Thirdly, this study further recognizes that

implementing cost system refinements in hospitals typically requires progress in

stages before full adoption is achieved [2, 11].

The results of our survey, conducted in the hospital sector, show that cost system

improvement in hospitals, is largely determined by health care specific factors such as

the dissatisfaction with the legal system, the support of medical staff to cost system

use, the way the reimbursements between hospitals and their physicians are arranged

etc ... This seems to suggest that health care management should focus on hospital

specific elements in order to facilitate ABC adoption. Factors observed in other

industries have less explanatory power and as such they may be less crucial for further

promoting cost system change.

2. Literature Review

In many countries hospitals are legally required for refunding purposes to have a

predefined cost allocation scheme [13, 14]. This makes them unique to other

industries where such a legal obligation does not exist. The legal system mostly takes

the form of a step-down allocation of costs from service departments (e.g.

administration, cafeteria, laundry, etc.) to revenue generating departments such as

acute care, surgery, laboratory. Sometimes cost are further allocated down to patient-

level. Often the legal system uses a large set of pre-defmed cost drivers (See U.S.

2
Medicare cost report in Eldenburg and Kallapur [13], [15]). While such legal systems

are quite elaborated, it does not preclude management from adjusting the cost system

to make it more relevant for their internal decisions [15, 16]. Rather than immediately

installing ABC, hospitals tend to change gradually towards ABC. They often start by

adjusting their existing legal system or they may first thoroughly consider ABC [2, 9,

17]. In that respect, hospitals seem to adhere similar implementation stages as other

industries [11, 18].

Our goal is to disentangle different levels of cost system design and the drivers in

a health care setting that explain this process of changing to ABC. To our knowledge,

evidence on this matter remains very scarce. As a first step we look at general drivers

of ABC-adoption from other industries. Next, we discuss several elements from our

own review of the health care sector that may drive (or inhibit) cost system change.

Finally, we provide specific control variables for the level of cost system in a health

care setting. Table 1 summarizes the drivers we identified and their expected direction

on cost system development. The next sections further explain these issues.

[Insert Table 1 about here]

2.1. General drivers of cost system development

There only exist a limited number of studies that identified some general drivers

of cost system improvement for firms in other industries. Below we provide more

detail on those general drivers that are expected to be relevant for a hospital setting.

Cost variability. Firms with a higher level of indirect overhead and greater

heterogeneity in the way products make use of the firm's resources, are expected to

introduce more refined costing systems [9,11, 19]. This issue may playa role in a

3
hospital context. Hospitals are often known as settings with many indirect cost

categories and they treat various patients via divergent care processes that often

consume overhead differently [17].

Cost importance. This issue mainly captures the way firms in other industries

perceive cost data as crucial for their decisions and their competitive position [20, 21].

Given the current pressure on margins, this issue may especially apply to hospitals.

We predict that the stronger the importance attached to cost data, the more likely that

a hospital will adapts its cost system.

Quality link. Firms that focus on quality often link their formal quality programs

with more accurate ABC-systems [10]. Similar considerations coexist in health care.

Hospitals initiating programs to improve the quality of the care processes may be

more in need of a cost system that accurately captures the cost of these different care

process [4, 17].

System State. This issue concerns the general elaboration of the IT -system within

a firm. The more elaborated and integrated the system and the more performance

measures it gathers, the easier it is to introduce ABC-systems that make use of IT-

systems and their information [22]. However, given that systems in health care often

are designed to only fulfil legal requirements [15], the culture and the resources for

hospital systems to integrate different applications and to issue performance

information may not yet be well established [2].

Perceived complexity. This issue in fact captures whether the firm's operational

environment is perceived as complex. Arguments in other industries seem to suggest

that complex-dynamic organizations may especially benefit more from more accurate

cost systems [23, 24]. This seems true for complex organizations such as hospitals

that often treat highly complex care processes [3]. However, the perceived complexity

4
might obstruct cost system improvement, since the ABC problem reqUIres very

specific data from these complex processes which may be too difficult to obtain in

hospital settings [5].

2.2. Hospital specific elements in cost system development

Hospitals have some umque features that are typically not observed in other

industries [25]. An important contribution is that our study is one of the few to discuss

the link of some of these features with the level of cost system design in hospital

settings. Below we give an overview of these hospital specific elements.

Satisfaction legal system. As already mentioned, hospitals are legally required to

use a predefined cost allocation scheme. This unique setting allows us to test to which

extent hospitals are satisfied with this system. Due to the level of detail, satisfaction

may be high such that hospitals may not screen other cost system options [26].

Conversely, criticisms as that the legal system would still produce unreliable cost

estimates may initiate cost system change [16].

Use legal system. This factor can be perceived as slightly different from the

previous one. While being unsatisfied about the legal system, hospitals may still

consider the system sufficient and consequently use it for their decisions. However if

management questions the usefulness of these figures [15] hospitals may be more

likely to change towards refined costing such as ABC.

Organizational support. This aspect captures the organizational support towards

cost system use. While cost innovations in other industries flow from top management

support [12], hospitals are further unique in a sense that they have to work with

physicians that are implicitly contracted without being employed for the hospital

5
[25,27]. As physicians are responsible for a large part of the health care expenditures

[28], their support towards cost control in general may be important for further cost

system enhancement. Besides management and physicians, the support of the heads of

various nursing departments is an additional factor that should not be overlooked. In

sum, hospitals may be further evolved on the spectrum of cost system design when

different organizational members support cost control.

Management-physician conflict. In hospitals, physicians often perceIve cost

control as very different from management. Physicians dictate that the provider-

patient relationship is quite unique and do not want to give up the freedom to deploy

as much resources as needed for the specific care of a patient [29]. This often does not

stroke with ideas of central management that needs to plan resources for the hospital

as a whole [30]. It has been shown that potential conflict between parties can arise

that may hamper any innovation, such as cost system improvements [25, 31]. Such

conflict is even more likely if physicians feel that they are controlled by central

management. This is especially true if cost allocations are only used for assessing

(controlling) financial arrangements between physicians and hospitals [32]. Our study

assesses the level of conflict (directly by asking management to asses whether

relations with their physicians are optimal or not, and indirectly by asking the degree

of control through cost system use) as a factor that may drive or inhibit cost system

change in hospitals. Cost system improvements such as ABC are more likely when

relations with physicians are less conflicting or in other words more optimal.

Method of reimbursement. Reimbursement of health care providers (e.g. hospitals,

physicians) by health care payers (e.g. governments, insurers) typically consists of

financial flows for the operational cost of the hospital and physician labor [13, 33]. In

many countries financial flows are centrally collected by one party (mostly the

6
hospital) who than agrees with the other party on how to split these flows between the

hospital and the physician. To this end, several schemes exist that can either be

classified as retrospective, in which the physician receives his fee minus a payment on

the basis of the own costs he incurs (physician cost based), or as prospective in which

physicians receive a fixed 'percentage' of the total revenues or financial surpluses

(profit) of the hospital [34].

The reimbursement scheme may have an effect on the level of cost system design.

If they remain physician cost based (retrospective), payments are based on the indirect

overhead assigned to a specific physician [33, 34]. Management may then not be very

motivated to control costs, because physicians simply pay back most of the hospital

costs. In addition physicians may prefer a pre-defined legal cost system, as they may

fear that new cost systems give management more discretion to maximize the

financial streams for the hospital [13, 35]. New ABC systems, may lead to endless

debates between hospitals and physicians over the specific assignment of overhead

costs, which may hamper any cost system change [14]. Conversely under prospective

systems, payments are at least not physician cost based. Furthermore, if payment is

based on surplus (profit) rather than on total revenues this may create some incentives

for cost control and as such there may be a need for ABC [36].

2.3. Specific control variables

Prior work suggests a positive relation between firm size and the level of ABC-

adoption [9, 10, 11] did not find such an effect. Evidence in the health care sector

suggests that larger hospitals in terms of bed size more extensively use their cost

system [2]. We therefore take 'Bedsize' as a first potential control variable of the

7
level of cost system development. As a second control variable we check whether

hospitals are involved in a merger. Those hospitals that struggle for survival are often

restructuring their operations via mergers and therefore limited resources are not spent

on improving the cost systems [2]. Mergers take up most of the time and cost system

improvements are probably postponed until the merger is completed.

3. Research Method

3.1. Research Sample

The survey was conducted on a sample of hospitals, located in Flemish part of

Belgium. Similar to most other countries, all hospitals in our sample are required to

issue a legal cost report based on an elaborated set of drivers in a step-down allocation

scheme from service to revenue generating departments. In addition, these hospitals

also agree on various reimbursement schemes with their physicians. A total of 120

questionnaires were issued to either general hospitals, academic hospitals, psychiatric

hospitals or specialized hospitals. The survey administered questions to identify the

stage of cost system development and the hospital specific and general drivers that are

possibly linked with the level of cost system design (sections 3.2 and 3.3 give more

detail about the survey items). The survey was either addressed to the chief executive

officer of the hospital facilities or the chief of the administration and financial

department. These respondents are most likely to be informed about the design and

the use of cost systems in their hospital.

Of the 120 questionnaires, we received 50 valid responses. This corresponds to a

response rate of about 42%. Of the 50 valid replies, 48% came from general private

8
hospitals, 10% from general public hospitals, 38% from psychiatric facilities and the

remaining 4% from either academic or specialized private hospitals. It is important to

note that the sample's distribution is not significantly different from the distribution

within the total population of 120 Flemish hospitals (Chi-square: 2.3; p = 0.13). In

terms of size our sample counted 20% small facilities with less then 200 beds, 56%

intermediate-sized hospitals with 200 to 499 beds and 24% large hospitals with over

500 beds.

3.2. Dependent variable

The pnmary dependent variable for our study is the stage of cost system

development. Via our survey study we were able to identify three possible levels of

cost system design. A first group of hospitals only installed the legal system. A

second group of hospitals is in the process of changing their cost system. Either they

started with small adjustments to their legal system by introducing more specific

drivers and cost objects (e.g. patient-levels, DRG-levels) or they were in the process

of considering ABC [2, 9]. This group may be situated on a sort of 'intermediate

level' in the process of change towards more refined costing systems. The last group

is on a more advanced level of cost system refinement. They actually indicated to be

experimenting with ABC (Cfr. adoption phase; [11]) and as a result of this exercise

they developed an adapted cost system. Table 2 shows how the sample of 50 hospitals

is distributed across these three possible development stages of cost system design.

One should further note that hospitals in phase 1 are somehow distinct from the two

other groups. Unlike hospitals in phase 2 and 3, these hospitals do nothing in terms of

9
cost system refinement. In the result section, we report an additional model based on

this dichotomy.

[Insert Table 2 about here]

3.2. Independent variables

The general drivers and most of the hospital specific elements, except for the type

of reimbursement scheme, were measured via multiple (e.g. two or more) items that

were in fact based on our arguments of the literature review. Appendix A displays the

set of items issued. Respondents indicated the relevance for each item on a five-point

Likert-scale (1= strongly disagree; 5= strongly agree). A first set contains items for

the general drivers such as cost variability, cost importance, quality link, system state

and perceived complexity. The next set focuses on the remaining hospital specific

issues such as organizational support, satisfaction with and the use of the legal system

and the level of conflict between management and physicians. We preferred multiple

items because they capture more of a construct than single items [1, 37]. However to

test whether our items actually capture the presumed construct, factor analyses were

performed on both the sets of general drivers and hospital specific factors. The results

of these factor analyses are displayed in panel A of table 3. Results show that the

derived factors correspond closely to the constructs of the literature review, save for a

few exceptions that will be discussed below.

Regarding the general drivers, it is important to note that the construct cost

variability and cost importance form one factor "Cost_var". Apparently greater cost

variability is a synonym for more importance attached to cost data. All items of the

10
second factor "Syst_state" indeed relate to the state oflT-systems in the hospital. The

third factor "Complexity" forms the construct for the perceived complexity of the

hospital processes and the cost allocation. Finally, we mention that our last factor

does only partially captures our construct for the link of the cost system with quality.

It only loads high on the quality item F (Table Al in Appendix A). However, this last

factor has also high loadings on item G measuring the extent to which systems

generate various performance measures. We label this factor "PerClink" as the degree

of focus on performance measures in a hospital. Shields [12] suggests that this issue

may indeed be relevant if ABC adoptions want to succeed. Analysis on the hospital

specific items resulted in four factors with main items that indeed correspond to the

presumed construct. Only the second factor related to organizational support does not

load high on management support (Item L), suggesting that the views of management

on cost control are divergent from the views of the medical staff. We label this factor

"supp_ med" as the support of medical parties towards cost control. The other factors

are labeled as "sat_legal", "use_legal" and "conflict" according to their construct.

Similar as to Krumwiede [11, p. 249-250] we want use the factors as independent

variables for explaining the level of cost system design (section 3.1) To this end, we

calculated for each hospital a composite score for the derived factors. A composite

factor score is an aggregated score of responses giving the most weight to items that

load high on that specific factor. On average, they have a mean of zero and a standard

deviation of 1 and correlations between factors approximate to zero. Alpha levels on

the main items indicate that factors appear to be reliable and reasonably valid.

Finally, the remaining three independent variables, that is the hospital specific

factor for the type of reimbursement and our two control variables, were measured

directly via a single question. These variables are summarized in panel B of table 3.

11
The variable "Reimbursement" was based on a dummy. It is derived from the

question in which respondents indicated whether the reimbursement scheme was

based on physician specific cost elements such as actual cost or actual cost plus mark-

up (Reimburse= retrospective) or on a fixed percentage of revenues or hospital

surpluses (Reimburse= prospective). Next, the number of beds for each hospital

facility represented our first control variable "Size" while our second control variable

"Merger" is a zero vs. one variable (dummy) depending on whether or not a hospital

indicated to be highly involved in restructuring its operations (e.g. merger).

[ Insert Table 3 about here]

4. Empirical findings

We in fact performed two analyses. The first section uses the three levels of Table

2 as the dependent variable. In this way we can derive the factors that significantly

differentiate between the various stages of cost system design, that is the drivers of

cost system refinement. In the next section we study the dichotomy of hospitals that

do not perform any cost system refinement (minimum level) versus all others that

change. This analysis should shed light on the first initiators of cost system change.

4.1. Drivers of cost system development

Because of the specific order in the level of cost system design, an ordered logistic

regression is actually the most appropriate method for this analysis. Hospitals on an

advanced level (level 3) are further on the spectrum of cost system design than

12
hospitals in the process of change (level 2) or those that only have a legal system

(level 1). Modell in Panel B of Table 4 reports the results of this regression.

When studying the general drivers, we only observe a significant positive effect of

the variable 'cost_var'. Apparently hospitals that perceive high variability in costs and

that attach high importance to cost in general are more likely to adjust their cost

system in the direction of ABC. Summary statistics in Panel A of Table 4 show that

especially the hospitals that have changed their system as a result of ABC-adoption

(advanced), seem to find this issue much more important (higher factor score) than

those hospitals that are in the process of changing or that only have a legal system.

The state of IT-systems, the perceived complexity and the link with performance

(including quality) do not drive or inhibit cost system change in a hospital setting.

Regarding the hospital specific elements, we observe more significant effects.

First of all, 'satisfaction with the legal system' is significant and has a negative sign

(model 1 in panel B). From panel A we can argue that hospitals that are less satisfied

with the legal system are more likely to change or to install ABC (level 2 and 3)

compared to their counterparts that only use a legal system (level 1). Although the

system is quite elaborated, some Belgian hospitals seem to be unsatisfied as a result of

perceived shortcomings to the legal system [15, 16] and consequently these hospitals

are more likely to improve their cost system.

Panel A and Model 1 in Panel B further suggest that high support of the medical

team towards cost control (Supp_ med) is a factor that significantly differentiates

among the different stages of cost system design. Unlike in other firms where cost

system changes go through top management [12] our results point out that physicians,

medical boards and heads of nursing departments seem to be powerful coalitions that

may further stimulate changes towards ABC in hospital settings.

13
 As suggested in our literature review, the reimbursement scheme is significant.

Evidently, when reimbursements are physician cost based (retrospective) rather then

prospective (e.g. fixed percentage of revenues or surplus), hospitals are less likely to

change to ABC. Panel A indeed shows that none of the respondents in phase 3 had a

reimbursement scheme based on physician costs (retrospective), while there are still a

large number of users of retrospective schemes in phase 2 (45,8%) and phase 1

(55,0%). Under retrospective systems, physicians may fear that hospitals will use cost

system changes to alter the cost-based amount physicians have to refund [36]. At least

prospective schemes are not based on cost allocations and if they further use a fixed

percent of hospital surpluses (instead of revenues), they may stimulate a need for

better cost control in order to increase the hospital surplus.

Our two remaining hospital specific factors 'conflict management-physician' and

'use legal system' do not seem to differentiate among the different development

stages. However, not only arguments of our literature review but also evidence from

correlation tests 1 allude to a possible link of the reimbursement scheme with these two

variables. When reimbursements are based on cost allocations (retrospective), there is

more conflict between management and physicians probably resulting from debates

over which cost to include in the analysis. Secondly, a likely explanation why

retrospective systems may be linked to higher use of the legal system is that

physicians may prefer (or force) the legal system for cost reimbursements. Unlike

with new cost allocations where management may change allocation bases to

maximize financial streams for the hospital [13], the legal system uses at least pre-

defmed cost allocation bases, so that hospital management has less discretion to

maximize cost reimbursements emanating from the physician.

1 Correlations of conflict and reimbursement (r: -0.367; p: .009) suggest that relations with physicians
are less optimal when reimbursements are retrospective. In addition legal systems are also used more
when reimbursement is physician cost based, though this correlation is weaker (r: 0.262; p: .066).

14
 Due to these interactions, possible effects of 'use_legal' and 'conflict' may not be

observed in model!. We therefore ran model 2 in which reimbursement was left out

the regression. Results show that 'conflict' and 'use_legal' become significant. In sum

this hints that cost system changes are more likely when there is little conflict between

management and physicians and when legal systems are considered as less useful for

decision-making, which may in tum be driven by the type of reimbursement scheme.

Finally, our variables do not load significantly in both our two models. Apparently

the hospital's size and its involvement in mergers do not differentiate between the

different development stages that our survey identified2 •

[ Insert Table 4 about here]

4.2. Minimum level vs. the changers

To single out the first initiators of change, we perform a binary logistic regression

of those hospitals that do not change (Minimum: level 1) vs. all others that change

(level 2 and 3 are taken together). Results are reported in model 3 and 4 of Table 4

and are similar to the models reported earlier, except for the fact that 'Cost_var' is not

significant anymore. The models suggest that the hospital specific factors such as the

satisfaction with the legal system, the support of medical parties and the method of

reimbursement (and climate if reimbursement is left out of the analysis) serve as the

first initiators of change. 'Cost_var' a general driver becomes only important in later

stages if we recognize the difference in intermediate level and advanced level (models

1 and 2), but not in the current analysis. Summary statistics indeed confirm that this

general driver especially matters at the more advanced level of cost system design.

2 Other measures for size, e.g. the number of full-time employees, were also not significant.

15
4.3. Implications a/the results

Hospitals tend to follow similar stages of cost system refinement as other industries.

Our results however suggest that hospitals should stimulate health care specific issues

rather than the general drivers of other industries. Only the level of cost variability

and cost importance as a general driver is important only at more advanced levels of

ABC adoption. Hospital specific issues in fact serve as initiators of change towards

ABC. Especially the support of the medical staff should be considered if hospitals

refine their cost system. Other measures such as the awareness of limitations of the

legal system can further initiate cost system change. Of special interest is that

management may need to revise the method of reimbursements between hospitals and

physicians in order to ease ABC-adoption. If reimbursements remain physician cost

based ABC adoption is difficult; cost system change may then further be precluded

because of more conflicts and greater use of the legal system.

5. Discussion

As hospitals' income is under pressure as a result of rising health care costs and

more restrictive budget constraints, hospitals are looking for options to become more

cost efficient. For assisting their strive for cost efficiency, health care organizations

may want to adopt more refined costing techniques, such as activity based costing

(ABC) as they have proven to be successful in other industries [6]. However the

factors that facilitate (or inhibit) this change towards ABC have not yet been

investigated in hospital settings. Via a survey we single out factors that explain further

cost system development in a health care context. First of all, the survey shows that

16
similar to other industries cost system change in hospitals gradually happens in

different stages. However and more importantly, results indicate that the general

drivers of ABC adoption from other industries are less crucial for promoting cost

system change in hospitals. Apparently, typical features of the health care sector such

as the satisfaction with and the use of the existing legal system, the support of the

medical team, the level of conflict with and the way in which physicians are

reimbursed seem to explain variations in cost system development among hospitals.

Hospitals are quite unique settings in a sense that they have to work with highly

autonomous groups of physicians [25, 27]. While cost system changes normally flow

from top management [12], our results suggest that in hospitals physicians and other

medical parties are apparently powerful coalitions when it comes to redesigning cost

systems. Not only the support of the medical team towards cost system change, but

also a minimal level of conflict with the physician, make cost system change towards

ABC more likely. The way hospitals arrange their reimbursement with the physicians

may also require reassessment. If refunds depend on cost allocations, there may be

endless debates over which cost to include in the analysis. Furthermore, physicians

are not likely to go along with cost system changes as new cost systems such as ABC

may give hospitals more discretion to maximize the cost reimbursement streams from

the physician. Conversely changing to ABC is easier if reimbursements are not

physician cost based. In sum, it is important for hospitals to consider the stakes of the

physician and their support towards cost systems in the process of cost system

refinement.

The fact that specific issues of the sector are more crucial for promoting cost

system change may explain why hospitals typically lag behind other firms. Installing

ABC apparently requires a different approach in hospitals. For example, the change of

17
attitude of the physician, installing new reimbursement schemes may require time that

can slow down the process of changing towards ABC. We however do not depict

factors of other industries as not important. Hospital specific factors may be the first

steps of cost system change, while general drivers may become highly important in

later stages (e.g. this applied to a certain extent for the general driver cost variability).

The quality of IT -systems, top management support, the link with performance and

quality measures, the perceived complexity may all be crucial factors in the process of

ABC to grow to a fully operational system. Unfortunately, we only had a limited

number of hospitals that adapted their cost system via ABC. Therefore, it is difficult

to recognize further divisions in the type and the level of ABC-systems within this

group. We however leave this fascinating conjecture for future research.

Appendix A

[Insert Table Al about here]

Acknowledgements

The authors want to thank Greet Vandemaele for her assistance in data collection.

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Table 1.
Relevant issues in cost system development
General drivers Hospital specific issues Control variables
Cost variability (+) Satisfaction legal system (-) Hospital size (+)
Cost importance (+) Use legal system (-) Involved in merger (-)
Quality link (+) Organizational support (+)
System state (+/-) Management-physician conflict
Perceived complexity (+/-) (+ ifless conflict)
Reimbursement (retrospective, -)

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Table 2
The different phases of cost system development identified by the survey

Phases of cost system development Number of Percentage

Hospitals
1. Minimum: Only the legal system 20 40%
2. Intermediate: Process of changing the cost system 24 48%
3. Advanced: Adapted cost system as result of ABC adoption 6 12%
Total 50 100%

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Table 3
Definitions of the independent variables

PANEL A: Independent variables as a result of a factor analysis a

Definition and main items Variance Reliability b Range com posite

Variable (item info in armendix A} EXQlained (AIQha} Factor score
Factor analysis on the general drivers, 4 factors extracted:

Cost Var The importance of cost data 21,96% 0.7433 -2,21 to 1,32
and the variability of costs
(items A, B, C, D)
Syst_State The quality of information 15,58% 0.6693 -2,11 to 2,31
Systems
(items G, H, I)
Complex The perceived complexity of 14,77% 0.5217 -2,47 to 1,81
the hospital environment
(items J, K)
PerLLink Extent to which perfonnance 13,58% 0.6382 -1,85 to 2,42
measures are used in hospital
(items F and G)
Factor analysis on the hospital specific elements, 4 factors extracted:

Sat_Legal Satisfaction with legal system 23,99% 0.8976 -1,62 to 3,34

and its perceived accuracy
(items P, Q, R)
Supp_Med The importance that medical 20,52% 0.8418 -2,00 to 2,28
Parties attach to cost system
(items M, N, 0)
Use_Legal The extent to which legal 14,80% 0.5185 -2,13 to 2,49
System is used for decisions
(items S, T, U)
Conflict C Level of management- 12,30% 0.6313 -2,62 to 2,10
physician conflict
(items V, W inverted)

PANEL B: Independent variables based on a single question

Variables Definition
Size (contol) The number of beds of a hospital facility

Merger(control) Dummy for whether a hospital is involved in restructuring

operations (0 for low involvement; 1 otherwise)
Reimburse (hospital) Dummy for reimbursement scheme; 0 for prospective; 1 if it is
physician cost based (retrospective)

a Factors extracted using the principle component analysis (rotated solution; Eigenvalues all > 1)
b Alpha based on the main items between brackets (efr. items with the highest loadings for that factor)
C Higher scores actually represent a more optimal relation and hence a lower level of conflict

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Table 4
Summary statistics and regression results

Panel A: Average statistics of the variables (factor scores) for each cost system phase
Phase 1 Phase 2 Phase 3
Minimum intermediate advanced
General
Cost Var -0,28 -0,01 0,96
Syst_state 0,18 -0,20 0,19
Complex -0,03 0,12 -0,36
Perf link -0,41 0,33 0,04
Hospital
Sat_Legal 0,55 -0,41 -0,21
Supp_med -0,49 0,23 0,74
Use_legal 0,17 -0,03 -0,46
Conflict" -0,23 0,07 0,49
Reimburse (%retrospective) 55,0% 45,8% 0,0%
Control
Size (Average No. Beds) 331 426 402
Restruct (% highly involved) 30,0% 58,3% 33,3%

"Note that the conflict variable uses the inverted score of item W. A higher score means less conflict as
the relation with the physician is more optimal and costs are less used for fmancial control purposes.

Panel B: Regression results

Ordered logistic regression" Binary logistic regressionb
Three develoQment stages Minimum level versus changers
Modell Model 2 Model 3 Model 4
Variable Estimate {sign.) Estimate (sign.) Estimate (sign.) Estimate {sign.)
Coeff 1 0.249 (.633) -0.382 (.438) 0.854 (.440) -0.618 (.391)
Coeff 2 2.875 (.001)*** 2.016 (.001)*** I I
General
Cost Var 0.588 (.019)** 0.481 (.038)** 1.023 (.102) 0.468 (.265)
Syst_state -0.082 (.693) -0.024 (.904) -0.609 (.168) -0.263 (.426)
Complex -0.210 (.304) -0.226 (.176) -0.128 (.674) -0.122 (.634)
Perf Link 0.208 (.365) 0.116 (.592) 0.713 (.207) 0.332 (.388)
Hospital
Sat_Legal -0.750 (.002)*** -0.630 (.002)*** -1.619 (.009)*** -1.135 (.005)***
Supp_Med 0.738 (.003)*** 0.697 (.003)*** 1.108 (.038)*' 0.902 (.046)**
Use_Legal -0.287 (.193) -0.423 (.044)** -0.171 (.669) -0.445 (.186)
Conflict 0.261 (.266) 0.474 (.030r 0.582 (.178) 0.693 (.076)*
[Reimburse= 1] -1.183 (.012)** I -1.863 (.059)* I
Control
Size 4.2e-04 (.634) 4.2e-04 (.623) 1. 9e-03 (.186) 9.5e-04 (.420)
[Restruct= 1] 0.297 (.493) 0.271 (.512) 0.621 (.415) 0.952 (.143)

Chi-square model 41.71 (.001)*'* 35.10 (.001)*** 40.4 7 (.001)*** 35.46 (.001)'*'
Pseudo R-square 0.566 0.504 0.555 0.508

a dependent: Y=l (minimum), Y=2 (intermediate), Y=3 (Advanced)

b dependent: Y=O (Only a legal system, minimum); Y=l (Changers=intermediate & advanced)
*,* *,** *, significant at respectively 10%, 5%, 1% level

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Table AI: Item list (used in factor analyses) and summary statistics per item
Percentages
Items 1 2 ~ 4 ~ mean S.D.
General drivers in other industries
Cost variability
A. Certain care processes (DRG's), patients 2% 2% 22% 20% 54% 4,22 1,00
require more costs than others
B. The indirect costs constitute a larger part of 0% 10% 24% 34% 32% 3,88 0,98
total costs
Cost importance
C. Cost information is important for staying 2% 6% 12% 27% 53% 4,24 1,01
competitive as a hospital
D. Accurate cost data is crucial for our hospital 0% 0% 4% 34% 62% 4,58 0,57
Quality link
E. Total Quality Management of our health 0% 2% 18% 31% 49% 4,27 0,83
care processes is a very important issue
F. Our personal is rewarded for improving 14% 45% 31% 6% 4% 2,41 0,94
the quality of service to the customer
System State
G. Cost systems are linked to a spectrum 6% 33% 27% 29% 4% 2,92 1,02
of different performance measures
H. The various IT systems (electronic patient 16% 31% 29% 20% 4% 2,65 1,09
files, inventory) are strongly integrated
1. It is difficult to use our systems for defining 2% 18% 27% 39% 12% 3,38 1,03
standard activities at the patient level
Perceived complexity
J. Care process in our hospital are highly complex 0% 4% 25% 45% 24% 3,89 0,81
K. For our specific hospital it is complex to 8% 36% 28% 26% 2% 2,78 1,00
allocate cost in an accurate manner
2. Organizational and behavioral items within health care
Organizational support
L. The board of directors strongly supports 7% 7% 35% 39% 13% 3,46 1,03
cost allocation (top management)
M. The medical board strongly supports cost 21% 19% 47% 12% 2% 2,56 1,03
system use (physician)
N. The physicians strongly favor the use of 26% 19% 42% 12% 2% 2,47 1,08
cost systems (physician)
O. Heads of various nursing departments 23% 21% 46% 10% 0% 2,44 0,97
support cost control (nursing)
Satisfaction legal system
P. We are satisfied with the legal costing system 14% 37% 31% 16% 2% 2,55 0,99
Q. Cost drivers of the legal system allocate cost in 12% 45% 31% 10% 2% 2,45 0,90
a logical manner
R. Cost calculated under the legal system quite 14% 51% 24% 10% 2% 2,35 0,91
accurately reflect the true cost
Use legal system
S. The legal system is easy to use 6% 24% 16% 39% 14% 3,34 1,17
T. The legal system is not optimal but it satisfies 10% 33% 33% 16% 8% 2,78 1,08
our decision needs
U. The legal system is often used in our decisions 20% 25% 24% 24% 8% 2,75 1,25
Conflict management-physician
V. Our relationship with our team of physicians 4% 18% 22% 49% 8% 3,39 1,00
can be described as optimal
W. Cost allocation is only a necessity in 37% 35% 24% 2% 2% 1,96 0,94
managing financial relations with our
physicians

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